Ford posts $3.3 billion quarterly profit, but warns worst of chip shortage still to come

Ford Motor Co. booked a $3.3 billion profit in the first quarter, but warned that it could lose as much as half of its planned vehicle production for the second quarter amid a worsening global semiconductor shortage — a prospect one analyst called "jaw  dropping."

The Dearborn automaker generated $36.2 billion in revenue and delivered a profit margin of 9%. Executives attributed the results to efforts to mitigate the impact of the chip shortage, a refreshed vehicle portfolio in the midst of being rolled out, and longer-term changes aimed at improving the fundamentals of the business. 

"What you're seeing come through the numbers is good execution by the team," said chief financial officer John Lawler. "They really leaned into optimizing the mix of our products, with an emphasis on moving vehicles that are in high demand from our customers and have higher margins for us."

But executives also pointed to changes such as the shift in North America to an SUV- and truck-focused lineup, and a global restructuring plan under which Ford has closed facilities overseas and slashed $1 billion in costs in Europe to become a leaner company. 

"We're executing on our plan, and I'm excited to say Ford is becoming a stronger, more resilient company that can deliver under pressure, manage risk and seize opportunities, all while generating consistent returns for our stakeholders," CEO Jim Farley said.

Among the financial highlights: Revenue was up nearly 6% over the first quarter of 2020, adjusted pre-tax earnings of $4.8 billion marked a record for the company, and warranty costs — a nagging issue for the automaker — were down $400 million from a year ago. 

Executives also highlighted improvements to financial results in regions around the world. Outside North America, the company saw pre-tax earnings tied to the automotive business of $454 million — a significant improvement over the $526 million loss it posted in the same period last year.

In North America, Ford posted a 12.8% pretax earnings margin — higher than the 10% goal the company has been targeting and the highest rate in five years. Executives attributed 5% revenue growth in the region to strong demand for new vehicles such as the Mustang Mach-E, Bronco Sport SUV and redesigned F-150.

The company posted a $73 million pretax earnings loss in South America; generated $341 million in pretax earnings in Europe; saw a $15 million loss in China; and booked a $201 million pretax earnings gain in its other international markets — all of which were profitable except for India, Lawler said. 

Adjusted free cash flow for the quarter, however, was negative $396 million. Ford shares closed down by less than one percent, to $12.43 per share, before the financials release.

Despite the strong first quarter results, executives warned of future fallout from the chip shortage, saying the situation will get worse before it gets better. The company now expects the shortage to peak in the second quarter, then to begin to ease throughout the remainder of the year before full relief arrives in 2022.

To that end, the automaker said it expects to lose about 50% of the production it had planned for the second quarter (or about 700,000 units), worse than the 17% loss in the first quarter. Executives said they expect to lose about 10% of production that had been planned for the second half of the year, for a total loss of some 1.1 million vehicles this year. That's up significantly from the 200,000- to 400,000-vehicle impact the automaker had initially expected.

Nick Shields, senior analyst at investment research firm Third Bridge, said in a note Wednesday that while "the quarter itself was solid" for Ford, its projected production loss for the second quarter "is nothing short of jaw dropping."

Lawler had previously projected that Ford could take a $1 billion to $2.5 billion hit to its annual earnings due to the shortage. The company on Wednesday updated its guidance to account for factors that exacerbated the shortage, including a fire at a chip factory in Japan.

The company is forecasting adjusted pretax earnings of between $5.5 billion and $6.5 billion for the year, reflecting an estimated $2.5 billion hit from the semiconductor shortage. The company had previously estimated pretax earnings of $8 billion to $9 billion for the year.

Meanwhile, the automaker has been building and setting aside F-150s and other vehicles, opting to hold the vehicles until missing electronic modules containing semiconductor chips can be added. Executives said Wednesday that as of the end of the quarter, some 22,000 vehicles — primarily in North America — were sitting waiting for parts.

The shortage of chips — essential components that help power everything in a vehicle from infotainment systems to power steering — could cost the global auto industry up to 3.1 million vehicles and more than $61 billion this year, according to a forecast from industry consulting firm Alix Partners.

Experts say that the continued popularity of Ford's flagship F-150 pickup truck and rising vehicle prices have helped the automaker weather the chip issue and other disruptions brought on by the coronavirus pandemic.

Though Ford's U.S. sales were up only 1% in the first quarter, the average transaction price for its vehicles jumped 8.3% to $47,858, according to data from auto information website Edmunds.com. 

"F-150 remains one of the most coveted trucks in the industry, and although Ford's first quarter sales were flat, the company has sustained increases in average transaction prices which should help drive profitability," Jessica Caldwell, executive director of insights for Edmunds said in a statement ahead of Ford's release. "Ford is hanging on tight for now, but might find itself in a less secure position as this chipset shortage continues with no immediate end in sight."

And though the current imbalance between supply and demand will begin to normalize in the coming months, executives said some changes could be here to stay.

"We're learning as we operate in this extraordinary low-stock, high-demand environment in the U.S. and around the world, that we will see a leaner, more efficient company in the future," Farley told Wall Street analysts. "This is a better way to run our business."

Ford's crosstown rival General Motors Co. is scheduled to release its first quarter financial results May 5. Transatlantic automaker Stellantis NV will share first quarter revenue and shipments the same day.

jgrzelewski@detroitnews.com

Twitter: @JGrzelewski